RE: RE:Spyglass ??!! Unfortunately, the tables will not paste from Glass, Lewis & Co' s "against" opinion. Scotia also remains negative on the deal this week. Do your own due diligence, as they say. Perhaps a new board will help?
PROXY PAPER
PACE OIL & GAS LTD.
Toronto Stock Exchange: PCE
ISIN: CA69374D1042
MEETING DATE: 19 FEBRUARY 2013
RECORD DATE: 14 JANUARY 2013
PUBLISH DATE: 07 FEBRUARY 2013
COMPANY DESCRIPTION
Pace Oil & Gas Ltd. engages in the acquisition,
exploration, development, and production of oil and
gas resources in Alberta and British Columbia, Canada.
INDEX MEMBERSHIP: NONE
SECTOR: ENERGY
INDUSTRY: OIL & GAS OPERATIONS
COUNTRY OF TRADE: CANADA
COUNTRY OF INCORPORATION: CANADA
VOTING IMPEDIMENT: NONE
DISCLOSURES: NONE
OWNERSHIP COMPANY PROFILE PREVIOUS BOARD COMPENSATION VOTE RESULTS APPENDIX
2013 MERGER PROXY
PROPOSAL ISSUE BOARD GLASS LEWIS CONCERNS
1.00 Merger/Acquisition FOR AGAINST
SHARE OWNERSHIP PROFILE
SHARE BREAKDOWN
A
SHARE CLASS Common Shares
SHARES OUTSTANDING 46.9 M
VOTES PER SHARE 1
INSIDE OWNERSHIP 2.59%
STRATEGIC OWNERS** 2.59%
FREE FLOAT 98.03%
SOURCE CAPITAL IQ. AS OF 30-JAN-2013
TOP 20 SHAREHOLDERS
HOLDER OWNED* COUNTRY INVESTOR TYPE**
1. BlackRock, Inc. 9.20% United States Traditional Investment Manager
2. EdgePoint Investment Group Inc. 5.21% Canada Traditional Investment Manager
3. AGF Management Limited 2.35% Canada Traditional Investment Manager
4. Dimensional Fund Advisors LP 2.31% United States Traditional Investment Manager
5. Kennedy Capital Management, Inc. 0.73% United States Traditional Investment Manager
6. Canada Pension Plan Investment Board 0.61% Canada Government Pension Sponsor
7. Stripling, Judith Ann 0.54% N/A Individuals/Insiders
8. Woods, Frederick N. 0.48% N/A Individuals/Insiders
9. IG Investment Management, Ltd. 0.44% Canada Traditional Investment Manager
10. The Vanguard Group, Inc. 0.43% United States Traditional Investment Manager
11. Buchanan, Thomas W. 0.34% N/A Individuals/Insiders
12. Qwest Investment Fund Management Ltd 0.33% Canada Traditional Investment Manager
13. Weldon, Andrew D. 0.27% N/A Individuals/Insiders
14. Pasieka, James Murray 0.21% N/A Individuals/Insiders
15. Teachers Insurance and Annuity Association College Retirement Equities Fund 0.14% United States Traditional Investment Manager
16. Saizew, E. Martin 0.13% N/A Individuals/Insiders
17. Miller, Dale A. 0.11% N/A Individuals/Insiders
18. State Street Global Advisors, Inc. 0.11% United States Traditional Investment Manager
19. Kalmakoff, Chad L. 0.11% N/A Individuals/Insiders
20. Redwood Asset Management Inc. 0.10% Canada Traditional Investment Manager
*COMMON STOCK EQUIVALENCE (AGGREGATE ECONOMIC INTEREST) SOURCE: CAPITAL IQ. AS OF 30-JAN-2013
SHAREHOLDER RIGHTS
MARKET THRESHOLD COMPANY THRESHOLD
VOTING POWER REQUIRED TO CALL A SPECIAL MEETING N/A 0%
VOTING POWER REQUIRED TO ADD AGENDA ITEM 1% N/A
**CAPITAL IQ DEFINES STRATEGIC SHAREHOLDER AS A PUBLIC OR PRIVATE CORPORATION, INDIVIDUAL/INSIDER, COMPANY CONTROLLED FOUNDATION,
ESOP OR STATE OWNED SHARES OR ANY HEDGE FUND MANAGERS, VC/PE FIRMS OR SOVEREIGN WEALTH FUNDS WITH A STAKE GREATER THAN 5%.
PCE February 19, 2013 Merger Proxy 2 Glass, Lewis & Co., LLC
1.00: MERGER/ACQUISITION
SUMMARY
Pace Oil & Gas Ltd. (“Pace” or the “Company”), AvenEx Energy Corp. (“AvenEx”) and Charger Energy Corp (“Charger”
or the “Company”) have entered into an arrangement agreement, pursuant to which the Company will effectively acquire
AvenEx and Charger in a three-way, all-stock merger transaction. Under the terms of the agreement:
1. Pace will effectively undertake a 1.3-for-1 stock split.
2. Pace will issue 0.18 of a post-split Pace share in exchange for each outstanding Charger share.
3. Pace will issue 1 post-split Pace share in exchange for each outstanding AvenEx share.
Upon completion of the transaction, AvenEx, Charger and Pace will merge together to form a new combined corporation
called “Spyglass Resources Corp.” (“Spyglass”), and each post-split Pace share will be converted into a share of
Spyglass common stock.Spyglass is expected to be listed on the Toronto Stock Exchange (“TSX”) under the symbol
“SGL”.
Key figures of the proposed transaction are summarized in the table below:
Elbow River Transaction
Concurrently with the execution of the arrangement agreement, AvenEx and Parkland Fuel Corporation (”Parkland”) have
entered into a binding purchase and sale agreement, pursuant to which the Company has agreed to sell its Elbow River
Marketing business to Parkland in exchange for aggregate cash proceeds of C$80.0 million (US$80.94 million)(the
“Elbow River Transaction”). The Elbow River Transaction is expected to close by February 15, 2013, at or prior to the
effective time of the arrangement. Closing of the arrangement is conditional upon the completion of the Elbow River
Transaction.
Information Regarding Spyglass
The combined company will be managed by the current executive team of Charger. Further, the combined company’s
board will have a total of 8 directors, each of whom is currently a director and/or executive of AvenEx, Charger and/or
Pace. Specifically, the Spyglass board will comprise:
One current executive director and one current non-executive director of AvenEx;
Two current non-executive directors of Charger;
One current executive director and one current non-executive director of Pace; and
Two representatives who are currently directors and/or executives of both Charger and Pace.
Randy Findlay (current non-executive director of Charger) will serve as chairman of the Spyglass board.
PCE February 19, 2013 Merger Proxy 3 Glass, Lewis & Co., LLC
For at least the six-month period following the effective date of the merger and subject to the discretion of Spyglass’
board of directors, Spyglass intends to implement a monthly dividend of C$0.03 (US$0.03) per Spyglass share. The
Spyglass board will review its dividend policy on a monthly basis. Management of Spyglass will employ an active
commodity price hedging strategy to protect its proposed dividend and capital program. Spyglass plans to protect up to
60% of production by volume using a rolling 12-month hedging strategy featuring a blend of fixed price and participating
products designed to reduce the impact of commodity price volatility on netbacks and cash flow.
In connection with the arrangement, Spyglass is expected to enter into a C$400.0 million (US$404.68 million) senior
revolving credit facility with a syndicate of chartered banks (the “Credit Facility”). The Credit Facility will be secured by a
first lien on the property of Spyglass and its subsidiaries. Management expects that Spyglass will have approximately
C$120.0 million (US$121.40 million) available on the Credit Facility upon closing of the proposed arrangement. Capital
expenditures for Spyglass are expected to range between $80.0 million and C$90.0 million (US$80.94 million and
US$91.05 million) for the upcoming year, with most of the spending to be directed towards light oil development.
VOTE REQUIRED
Approval of this proposal requires the affirmative vote of at least two-thirds of the votes cast by Pace shareholders, either
in person or by proxy, at the meeting.
The Company’s directors and officers, who collectively own approximately 2.0% of the Company’s issued share capital,
have entered into support agreements, pursuant to which they have agreed to, among other things, vote their Pace
shares in favor of the proposed arrangement.
GLASS LEWIS' ANALYSIS
Overview
The proposed merger appears to have come about after several months of talks and discussions among the various
parties. In early August 2012, the board and management team of Pace began to consider and discuss a number of
potential strategic initiatives to benefit long-term shareholder value, including a potential merger with Charger. Between
late-August and late-October 2012, the Pace board held a number of meetings to discuss potential transactions and
reviewed several informal proposals. Soon afterwards, the Pace board decided to undertake a more formal sale process
and thus directed its adviser to contact third parties to gauge their interest in a potential strategic transaction with the
Company. By late-November 2012, the Company had narrowed its evaluation down to three non-binding proposals,
including one from AvenEx and Charger. On November 27, 2012, AvenEx and Charger submitted an improved offer,
which led the Company to agree to negotiate exclusively with AvenEx and Charger for a three-week period. After further
discussions and due diligence activities, on December 20, 2012, AvenEx, Charger and Pace executed the arrangement
agreement and issued a joint press release announcing the deal.
It should be noted that two of the Company’s directors (Tom Buchanan and Mike Shaikh) are also directors on the board
of Charger, with Mr. Buchanan also being the current chairman and CEO of Charger. The Company states that it initially
formed an independent board committee to consider strategic options for the Company. The independent committee was
later disbanded in order to allow the entire board to take part in the sale process. However, the Company does indicate
that from late-November 2012 to the announcement date of the deal, Messrs. Buchanon and Shaikh abstained from
attending and voting at Pace board meetings relating to the proposed merger transaction. It’s also worth noting that
Messrs. Buchanon and Shaikh attended Charger board meetings where the proposed transaction was considered, but
they abstained from voting on any such matters at those meetings. In our view, Charger and Pace appear to have taken
acceptable steps to address the potential board conflicts here.
Strategic Rationale
The proposed merger is expected to result in a combined company with a diversified production base of crude oil and
natural gas. In particular, the Company estimates that Spyglass’ production capability will be approximately 18,000
barrels of oil equivalent per day, with approximately 55% weighted to natural gas and the remaining 45% to crude oil and
natural gas liquids. The board believes that the combined company will be able to achieve certain cost synergies through
reductions in general and administrative expenses. The combined company is also expected to be able to achieve
efficiencies of approximately C$25,000 (US$25,292) per barrel of oil equivalent per day through the contemplated capital
and development program for 2013. Moreover, the board believes that the combined company will have the ability to pay a
sustainable cash dividend to shareholders.
Financial Considerations
PCE February 19, 2013 Merger Proxy 4 Glass, Lewis & Co., LLC
On the financial side, the Company's financial adviser, National Bank Financial Inc., has rendered an opinion to the board
stating that the proposed consideration is fair, from a financial point of view, to the Company's shareholders. However, to
the best of our knowledge, the Company does not disclose the specific details of the analyses conducted by the adviser,
making it difficult for shareholders to ascertain how and why the adviser reached its conclusion.
We conducted our own analysis by reviewing the relative historical financial contributions of each of AvenEx, Charger and
Pace to certain of the combined company's financial and industry-specific operating measures, as shown in the table
below:
NOTE: For the purposes of this analysis, the selected financial and operational figures for AvenEx have been adjusted to exclude the results of: (i) the Elbow River Marketing
Business; (ii) AvenEx’s real estate division (discontinued operations); and (iii) certain oil and gas assets sold by AvenEx on November 26, 2012.
Our contributions analysis indicates that Pace will contribute a relatively high percentage of financial and operating
resources to the combined company relative to its implied ownership stake. In Particular, based on our selected
measures, we find that Pace’s range of financial and operational contributions to the combined company (51.0% to 72.7%)
exceeds Pace’s implied ownership of the combined company (47.9%). Thus, our analysis suggests that the deal may not
be particularly attractive to Pace on a contributions basis.
PCE February 19, 2013 Merger Proxy 5 Glass, Lewis & Co., LLC
We also compared the unaffected trading multiples of AvenEx, Charger and Pace to those observed in a selected peer
group, as shown in the table below:
Source: S&P Capital IQ
NOTE: EBITDAX is equal to EBITDA plus exploration and drilling costs. Peer group comprises the following 10 Canadian-listed firms in the crude petroleum & natural gas
industry: (i) Angle Energy, Inc.; (ii) Artek Exploration Ltd; (iii) Crocotta Energy Inc.; (iv) Delphi Energy Corp.; (v) Insignia Energy Ltd; (vi) Petrobank Energy and Resources,
Ltd.; (vii) Surge Energy Inc.; (viii) Winstar Resources Ltd.; (ix) Yangarra Resources Ltd.; and (x) Zargon Oil & Gas Ltd.
We see that Pace had been trading reasonably in line with the peer group on a trailing EBITDAX basis. In comparison,
the unaffected trailing EBITDAX multiples of both AvenEx and Charger exceeded the peer trading range.
We believe that our concerns may be further validated by Pace’s stock price movement following the announcement of
the deal. For the period between December 19, 2012 and February 5, 2013, we note that Pace’s stock price has fallen by
approximately 8.2%, which is better than the market-cap weighted, dividend-adjusted return of the peer group (-15.6%)
but worse than the return of a comparable industry index (2.2% by the Nasdaq Canada Oil & Gas Index) over the same
period (source: S&P Capital IQ).
It's worth noting that the Company does not currently pay dividends to shareholders. Comparatively, the combined entity
is expected to pay a monthly dividend of C$0.03 (US$0.03) per Spyglass share for at least the six-month period
immediately following the completion of the merger. However, to the best of our knowledge, the Spyglass board has not
provided any indication that it will continue paying a consistent dividend following the initial six-month period.
Other Factors
In our view, the aggregate termination fee potentially payable by Pace of C$9.0 million (US$9.11 million) is relatively
reasonable, as it only represents approximately 2.4% of the Company’s unaffected enterprise value and approximately
2.5% of the unaffected combined enterprise value of AvenEx and Charger. Further, we believe that the aggregate value of
accelerated equity awards and change in control payments to the Company’s directors and executives, totaling
approximately C$5.5 million (US$5.59 million), is acceptable, as such payments represent approximately 3.5% of Pace’s
unaffected equity value.
Conclusion
After review, we question whether the proposed merger, as currently outlined, truly represents the greatest value for Pace
and its shareholders. While the three way tie-up may represent the greatest opportunity for the Company, based on our
contributions analysis, the implied pro forma ownership stake of Pace shareholders in Spyglass would be less than the
value of the resources that it would likely contribute to the combined company. This issue is further compounded by the
fairly complex nature of the proposed transaction, as having three merging entities for a single transaction (along with a
pending sale of certain assets from one of the parties) could, in our view, make it more difficult for shareholders to ascribe
a clear implied deal valuation to each of the respective entities. Moreover, the Company has not, to the best of our
knowledge, publicly disclosed any sort of financial analysis that would justify the proposed transaction from the
perspective of Pace shareholders.
Taking these factors together in the aggregate, we do not believe that shareholders would be well served supporting the
proposed transaction at this time.
Accordingly, we recommend that shareholders vote AGAINST this proposal.
PCE February 19, 2013 Merger Proxy 6 Glass, Lewis & Co., LLC
APPENDIX
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LEAD ANALYSTS
M&A: Eric Dao
PCE February 19, 2013 Merger Proxy 7 Glass, Lewis & Co., LLC